Creating a Buffer

One of the best pieces of financial advice that I have ever received is to keep a buffer in your checking account. The amount of your buffer should be equal to the amount of a full month's worth of bills and expenses. The logic behind this is so that you will be in a position to spend the money you earned last month during the current month.

A lot of people have a set salary, so this system may not seem necessary, but assume, for example, that you worked for commission and you never know how much money you will earn from one month to the next. In this scenario, a buffer makes much more sense.

If you are working off of your commissions for the current month, how do you know how much money you have to spend? The month hasn't ended yet, so you don't have an accurate reflection of your income. What happens if you overspend and then get to the end of the month and realize you will not earn as much as you had intended?

If, however, you created a buffer in your checking account and during the month of April you are spending the money you earned in March, now you know exactly how much you have to work with in your budget. March has already ended, so you have a definite income amount to budget with. Now you know exactly how much you can spend in April.

This system of budgeting allows you to plan ahead and know exactly how much money you have to allocate to your budget so you can use your money in the most efficient way possible.